Legal Risks and Small Business Owners

Nobody said that running a business was going to be easy. All small business owners are aware that there is an element of risk to running your own business. There is no way to guarantee that your venture, whatever it is, will achieve the expected results.

Of course, the reason you’re running a business in the first place is that the rewards are potentially much higher than the risks. From the long-term perspective, your business can pay off and give you financial freedom and the lifestyle you want.

You should, however, be prepared for the worst at all times. You should, for instance, anticipate that you’re going to get sued at some point, even when you have done nothing wrong. (Especially in this day and age, the smallest lawsuit can cause downtime which can cause you to lose your business)

The financial impact of a lawsuit, should you get involved in one, can be devastating for your business. Just the attorney fees would cost you tens of thousands of dollars. The longer the case drags for, the more you’ll end up paying.

That’s why you need small business insurance. We will talk more about this later, but first, let’s take a look at five of the most common lawsuits you might have to deal with as a small business owner.

The 5 Biggest Legal Risks of Running Your Own Business

#1: Third-Party Injuries

Did you know that as a small business owner, you are responsible for injuries sustained to clients on your property? So if a customer was to slip on a wet floor in your office and got injured in the process, then it is your responsibility to pay for their medical expenses.

Doesn’t make sense, right? Yes, but depending on the severity of the injury, you will have to pay not just the medical bills, but also the cost of the physical therapy and rehabilitation. Not just that, you might be asked by the court to pay for the wages lost by them because of the injury.

Such third-party injury lawsuits can get very messy and you’ll probably end up spending tens of thousands on them. For this reason, most businesses carry general liability insurance. That could pay for most of legal expenses related to the third-party injury lawsuit.


 #2: Employee Injuries

It is not uncommon for employees to sustain occupational injuries because of falls and accidents, or adverse conditions at work. In this case, your business would need to have worker’s compensation insurance to cover the cost of the employee’s medical expenses and at least some of their lost wages.

In many states, it is mandatory for employees to purchase the worker’s compensation insurance. Even if this is not mandatory in your state, it is always good to carry this insurance. The last thing you want is for an employee to sue you for unpaid medical bills because of an injury sustained at work.

 #3: Defective Products

As a small business owner, you can be held liable for a physical injury sustained by a customer because of a faulty product sold to them – regardless of where you are positioned in the supply chain – as a manufacturer, distributor or retailer.

For example, as a restaurant owner, you can be held responsible if a customer suffers from food poisoning and ends up having to be hospitalized. In that case you will find yourself having to pay for the damages and medical expenses. Product liability insurance is a must if you are in the business of selling products of any type.

#4:  Breach of Contract

Breach of contract is a serious legal risk to any small business. If you sign a contract with a client to provide a service, such as catering for their wedding, you could end up in serious legal trouble if you don’t make good on that contract for any reason.

You could get sued for delivering late, for incomplete work or not meeting the exact terms of the contract. Breach-of-contract lawsuits are generally covered by professional liability insurance.

 #5: Discrimination and Wrongful Termination

The worst legal risk faced by a business is a discrimination lawsuit filed by an employee based on their allegation of being discriminated because of their race, sex, religion, color, nationality, age, pregnancy or disability. Such a lawsuit could potentially wreck your business.

Even a job applicant could file a lawsuit against you if they have a legitimate reason to believe that they were denied a position in your company because of their race, age or sex. Employment practices liability insurance offers some protection against such lawsuits by covering the legal costs. Just look at this lawsuit brought on by a former Tesla Employee. It’s important to see that even a large company with dedicated legal & HR department can’t avoid lawsuits from disgruntled employees.

How Small Business Owners Can Protect Themselves against Lawsuits

Nobody can predict what’s going to happen in the future, but it is important to be prepared nonetheless. Don’t allow a legal setback to destroy your business, for which you have worked so hard over the years.  Make sure to sign up for the right small business insurance policies. That should cover you in case you are hit by any of the lawsuits listed above. Even if you think that you’re properly covered, speaking with an insurance specialist can give you a better idea of areas that your business lacks. For instance: there’s general liability insurance, property insurance, workers comp, auto insurance, and other industry-specific insurance.

We know that these scenarios are hard to think about, but believe us- we’ve seen it all. Again, I hope that this has been helpful and opens discussion. If you have any recommendations for our next topic, reach out at [email protected]